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Wednesday 5 January 2011

Delving Into The VAT

So yesterday the top rate of Value Added Tax (VAT) increased from 17.5 to 20 per cent. How does it affect us? Is it fair? Could the Government revisit this area to raise yet more tax revenue? Well, one question at a time.

Most foodstuffs – and children’s clothes – are exempt at present (the wording is “zero rated”). Some items, like domestic gas and electricity supplies, attract a lower VAT rate (but see further down the post). But electrical and white goods, cars and their fuel, and things like CDs and DVDs, attract the top rate. Even food items classed as non-essential (which catches chocs and crisps) get hit. Land line and mobile phone services too.

So when I ordered a CD online yesterday, the price had gone up – only by a few pence, but it had increased. Next time I take the car for a fill-up, it will cost more. Eating out, and visits to the pub, will be dearer. So, that second question, is it fair?

Here we enter the customary political minefield: both Young Dave and Corporal Clegg were against a VAT rise before the General Election, both labelling such a move as “regressive”. Now their Government has done the deed, which, as the IFS has noted, hits the least well off 10% of society twice as hard as the richest 10%. That Chancellor of the Exchequer Gideon George Oliver Osborne, heir to the seventeenth Baronet, has decreed the rise permanent, while aspiring to cut the top rate of income tax, merely reinforces the feeling of unfairness.

And that is not all: as Governments elsewhere in the EU have demonstrated recently, VAT is a handy way to garner more tax revenue, even if rates ostensibly remain unchanged. The move by the minority PS Government in Portugal to move a host of items up the VAT scale – including preserves and fruit drinks – to the top rate of 23% I noted a while back.

Which begs the question: is there any possibility of this Government moving items – especially foodstuffs – up the VAT ladder, or even adding a third VAT rate between the top and reduced ones? Right now, I suspect the response will be a resounding “no comment”.


James1878 said...

"So when I ordered a CD online yesterday, the price had gone up – only by a few pence, but it had increased."

Don't know if your CD came from Amazon, but I believe they (and other large internet retailers) use a distribution address in the Channel Islands to avoid paying VAT. This is one of the ways Amazon can undercut prices offered on the High Street...by stores which pay more in the way of business rates, provide more jobs and thereby contribute more payroll taxes (Income Tax & NI).

I wonder if the VAT hike will have a further (marginal) negative effect on such small retailers?

Tim Fenton said...

It was Amazon - not sure where they source their stuff from. I also bought some CDs at HMV in Crewe earlier in the day, and from this morning's news, that may not be an option for much longer.

And thanks for looking in again!